What’s Hot in Crypto this Week?
It’s Ampleforth (AMPL). This is the second largest algorithmic stable coin after Empty Set Dollar (ESD), in terms of market cap.
But let’s back up. What is an algorithmic stable coin? First, a stable coin is — as the name implies — backed by a reserve asset for added stability. In this case, however, the AMPL coin also relies on algorithms to balance the circulating supply of the asset. In simple terms, the algorithm issues more coins when price increases, and buys them off the market when the price falls.
For example, assume a stable coin is priced at $1. When the price drops to $0.80, an algorithm recognizes the imbalance between supply and demand, and automatically sets a market buy order to push the price back. In case the price goes above $1, the algorithm sells assets to maintain the price on the predefined level that keeps the peg.
The other types of stable coins include fiat-collateralized ones, like USDC and USDT, which are backed by financial institutions; and crypto-collateralized, like DAI, which are backed by one or several digital assets, instead of cash, such as ETH and BAT.
Why is AMPL hot?
AMPL is meant to be pegged to the U.S. dollar — with daily “rebases” to stabilize price. The supply adjustment is made by inflating or deflating the holdings of every AMPL wallet. This is crucial, because it means that the value of a user’s holdings fluctuates with the market capitalization of AMPL.
The primary argument that Ampleforth makes for this counter-cyclical behavior is that the incentive to sell rises as prices increase, and the incentive to buy increases when the AMPL price decreases. This is meant to create an arbitrage opportunity for fast traders to profit before the market price of AMPL has time to adjust.
What’s Flipside’s Take?
AMPL has been around for a year and has had the hardest time maintaining its peg — rising all the way past $3 in July 2020.
The spike in price in July aligns with Ampleforth’s launch of “Geyser” — an incentive program that distributed rewards in AMPL for users who supplied AMPL-ETH liquidity on Uniswap, a non-custodial decentralized trading platform. That launch was on June 23.
In addition to earning Liquidity Provider fees on Uniswap, users who provided AMPL-ETH liquidity could take their Liquidity Provider tokens and stake them on the Geyser platform, thereby earning an even greater share of AMPL rewards. Lastly, users were additionally rewarded for not withdrawing their deposits. All of which inevitably created a flood of interest in Ampleforth.
It is important to note, however, that algorithmic stable coins are extremely new and these projects are positioned as experiments to grow and improve the decentralized finance space. It will be interesting to see over time how they adjust in order to reach the goal of algorithmic stability without collateral or debt supporting it.
The Flipside Crypto Asset Score Tracker provides institutional and sophisticated retail investors the ability to track over 500 cryptocurrencies’ fundamentals. FCAS Tracker is currently free to a select group of new users as it continues to develop the product. Visit Flipside here to gain access to Flipside Analytics.
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